Happy with the Airbus stake's price tag

BAE, which is Europe's largest weapons maker, has for a while now had its sight firmly set on the U.S., where it realized more than a third of revenue in 2005.

As part of its efforts to expand its foothold across the Atlantic and capture a larger chunk of the world's largest defense budget, BAE in 2005 purchased United Defense Industries, the maker of the Bradley tank.

As it seeks to focus on its defense activities and to free cash to make acquisitions in that sector, BAE earlier this month advised its shareholders to approve the sale of its 20% stake in European aircraft manufacturer Airbus to co-parent EADS (005730).

If BAE shareholders approve the transaction at a vote on Oct. 4, BAE will sell its holding for 2.75 billion euros ($3.5 billion), much less its original estimate.

The transaction will complete 10 days after shareholder approval and doesn't need clearance from regulators, Finance Director George Rose said on the call.

Dresdner Kleinwort said it was "unclear "whether the sale will get the thumbs up from shareholders at the current price.

But Turner denied that BAE was disappointed with the lower-than-expected price tag.

"We're really happy with the price we've got. It represents a good return to our shareholders. Now is the right time in the long-term interests of our shareholders to exit," he said.

Turner argued that Airbus faces significant challenges in the medium turn including a "revitalized Boeing
BA, -0.40%
and a weak dollar." He added that Airbus is likely to make a cash call to its shareholders at a time when BAE wants to focus on its defense markets and so that it's in the British company's best interest to call it quits.

Shares of EADS fell 26% on the day it warned of production delays with its A380 superjumbo program. Airbus has since replaced the head of the program Marc Champion.

BAE also warned Wednesday that it sees a weaker contribution from Airbus in the second half of the year and that the division is likely to fall under discontinued operations by the end of the year.

BAE has previously said it will return 500 million pounds to shareholders in a buyback following the sale.

Defense operations

BAE last month said it will sell Saudi Arabia 72 Eurofighter Typhoon jets, the first order for the combat planes outside Europe, under an agreement between the U.K. government and the Middle East kingdom.

Turner declined to give more details on the deal but said BAE intends to increase its focus on its six core markets of the U.K., the U.S., Australia, Saudi Arabia, South Africa and Sweden.

"I would be surprised if we don't make more acquisitions in the U.S. in the long term," he said.

Morgan Stanley said it continues to see upside from Saudi Arabia, related to Tornado upgrades and initial Typhoon revenues, with cash flow and earnings from the region expanding faster than consensus expectations in the second half of 2006 and 2007.

BAE also lifted its interim dividend by 10% to 4.4 pence a share and said it mostly concluded its pension contribution in the first half.

It added it expects modest organic growth for the year, which J.P. Morgan said was a "typically vague" statement.

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